Types of Inventory Management

Inventory management can have a profound impact on the bottom line.

Inventory is one of a business's most valuable assets, consisting of raw materials for items to be produced, as well as non-production inventory such as office supplies. Since a business often has a substantial sum invested in its inventory, it should ensure that a proper management system is in place to utilize the inventory. By selecting a specific inventory-management method, a business can maximize the return on the inventory investment.

Material Requirements Planning (MRP)

Material Requirements Planning (MRP) is an inventory-management system designed to optimize inventory levels based on production schedules. MRP dictates that inventory be available in sufficient quantities for the job at hand. Additionally, MRP requires that inventory should not be received too far in advance, to avoid carrying costs. An important part of MRP is the Bill of Material, which is essentially a master list of components that make up a finished good. The Bill of Material helps a company calculate lead times which the purchasing agent uses to acquire raw materials needed in the production process.

Just In Time (JIT)

The Just In Time (JIT) inventory-management system is designed to ensure that the company has minimum inventory holding costs. JIT dictates that the company acquire the raw materials needed for a job only after the company has booked a sale or received an order. The JIT method is pertinent in industries where inventories have the potential for high holding cost or a short shelf life. Companies can lower inventory holding costs and minimize the risk of possessing obsolete or spoiled inventory by not ordering raw materials until they are in direct demand for production.

Single Echelon Inventory Optimization

Single Echelon Inventory Optimization refers to the management of inventory whereby the company has only one distribution facility between it and its customers. This type of inventory management is simple, as the company only has to focus on one main channel through which its goods must flow. Single Echelon Inventory Optimization is used for small companies with limited inventory distribution channels.

Multi-Echelon Inventory Optimization

Multi-Echelon Inventory Optimization refers to the management of inventory where the company has multiple regional distribution centers as well as multiple forwarding centers. This type of inventory management is very complex, and is used for large companies with extensive inventory distribution channels.

References

• SAS: MRP Application Example--Introduction and Overview
• Dunn & Bradstreet: How To Use Just In Time Inventory Management
• Stanford University: Multi-Echelon Inventory Optimization